Terra collapsed only a month back. The high yield crypto product offering platform Celsius Network last week paused withdrawals on its platform due to liquidity issues. Three Arrows Capital, a crypto hedge fund, faced insolvency last week due to poor bets on GBTC, stETH and Luna. The market rightly came down after the collapse of Terra. There were two reasons for its collapse.
Easy Interoperability
Many protocols were interoperable with Terra. It was working closely with many crypto projects like Cosmos IBC. This was the reason many protocols suffered collateral damage when Terra came crashing down.
Bitcoin Faced Selling Pressure
Terra tried to protect its protocol by selling 80,000 bitcoins it held. When so many bitcoins were placed for sale by a large operator, it put immense pressure on the price of BTC.
Other Exploits
The crypto industry also saw exploits, hacks and scams in the DeFi area. Many crypto protocols were breached, causing the industry to lose close to $5B, according to the industry experts. Operators like Ronin, Poly and Wormhole suffered losses of $625M, $600M and $326M respectively. Each exploit took down not only the main affected protocol but also many other protocols that were connected to it. The main exploit led to a chain reaction of crashes. It showed the systemic risk the crypto industry faces.
At present operators like 3AC and Celsius are operating but the stress on their systems can be noticed. 3AC, a leveraged hedge fund in crypto, is likely to fail due to its bad bets. Celsius has halted withdrawals. Failure of both these platforms will lead to more troubles for the crypto industry.
